India’s Forex Reserves: Buffers Under Scrutiny as Oil Surge Raises Concerns

New Delhi – A recent analysis from Bernstein has ignited a debate on Dalal Street regarding the true strength of India’s foreign exchange reserves, moving the conversation beyond simple size to a more nuanced assessment of their deployability. As global oil prices rise and external balances face strain, the question of how effectively India can utilize its reserves to defend the rupee is gaining increased attention.

Structural Differences in Reserves​

Bernstein’s report highlights a critical distinction between gross and deployable reserves. A significant portion of India’s reserves is tied up in forwards and other less liquid forms, limiting immediate access to dollar liquidity. Market sentiment remains divided on the extent of this constraint.
Dilip Parmar, Senior Research Analyst at HDFC Securities, estimates that approximately 60 to 65 percent of reserves are readily deployable in a stress scenario. Conversely, Amit Pabari, Managing Director of CR Forex Advisors, notes a decline in liquid foreign currency assets from over 90 percent in 2021 to below 80 percent currently. With total reserves nearing $710 billion and highly liquid foreign currency assets (FCA) around $555 to 563 billion, plus forward commitments estimated at $60 to 100 billion, actual usable dollar liquidity becomes significantly constrained.

Gold’s Limited Role​

Gold has bolstered headline reserve values, currently valued at approximately $130 to 131 billion, but its immediate deployability for currency defense is limited. Rajeev Sharan, Head of Research at Brickwork Ratings, emphasizes that “Gold supports overall reserve strength, but it is not immediately deployable for currency intervention.” Ritesh Jain, Founder of Pinetree Macro, agrees, stating that forex reserves aren’t enough and that the Reserve Bank of India (RBI) lacks the firepower to intervene as it did previously.

Oil’s Impact on the Macro Backdrop​

The rising cost of oil remains the primary concern. A $10 increase in crude oil prices is projected to widen India’s trade deficit by $13–15 billion annually, given India’s reliance on imports, exceeding 80 percent of its oil needs. Rajeev Sharan adds that every $10 rise in oil can increase the current account deficit by around 0.3–0.5 percent of GDP. Remittances and services exports provide some cushioning, but face risks from potential disruptions in Gulf region flows, with estimates suggesting 10–20 percent cuts in inflows.
Jain points out that the INR’s depreciation was already occurring even with discounted Russian oil, suggesting deeper structural external imbalances and capital flow dynamics are at play. He highlights the shift from a current account surplus to a deficit and questions the new normal for crude prices, suggesting a potential valuation of INR beyond $100.

Currency Vulnerability and Shifting Trade Dynamics​

The INR’s vulnerability is being reassessed, particularly in light of rising settlements in the Chinese currency (CNY) for Russian and Iranian oil. This introduces a secondary layer of risk linked to shifting trade currency dynamics, with India potentially being “boxed into a corner” at the wrong time. Jain notes that the convergence of US inflation versus India’s inflation has weakened a traditional justification for INR depreciation.

Market Expectations and Potential Rupee Movements​

Analysts offer varied projections for the rupee’s future. Pabari, of HDFC Securities, believes Bernstein’s forecast of the rupee breaching 98 is somewhat overstated, anticipating near-term vulnerability if $100+ oil and foreign institutional investor (FII) outflows persist, with potential for a Rs 1 to 1.5 recovery on de-escalation. Parmar, at HDFC Securities, maintains an expectation between 93 and 95. Bernstein, however, suggests the rupee could weaken beyond 110 – a 17 percent+ depreciation from current levels near 94.
The quality, accessibility, and sustainability of India’s reserves are now under closer scrutiny. Market participants acknowledge the situation remains manageable, but the Street’s margin of comfort has narrowed significantly.